Representatives from proxy advisory firms ISS and Glass Lewis, along with major institutional investors (including CalSTRS, ING and TRowePrice) offered a preview of their evolving views on executive pay at this week’s annual conference of the National Association of Stock Plan Professionals (NASPP).
There were some interesting suggestions and observations on various aspects of compensation and disclosure:
Surprisingly, the SEC’s newly proposed rules for disclosure of CEO pay ratios were not a major focus of discussion among speakers or attendees. Rather, the overall tone was that companies and their advisors should move past criticism of the rules and focus on developing specific, meaningful cost/benefit arguments and recommendations to submit during the SEC’s comment process – which could be lengthy. Neither the advisors nor the investors have a good sense yet around how they’ll incorporate the pay ratio data. While the regulations don’t provide for a consistent calculation, the investors say it might be useful to track how an individual company’s pay ratio changes over time.
Companies are moving away from supplemental filings, which proxy advisors and large investors seem to think are now unnecessary. Their thinking is that a company should be able to address all the positive aspects, as well as any likely advisory firm criticisms, of its programs within the proxy itself. ISS believes its new peer group methodology resulted in better PFP alignment, fewer supplemental filings, and happier companies.
Coming down the pike from ISS:
- Draft policies should be out in mid to late October, and final policies (effective as of 2/1/13) should be out late November. Policy changes are anticipated to be minimal – there may be a small tweak to the peer group methodology and more of an emphasis on longer term performance under the PFP analysis.
- Another longer term ISS project includes revision of its current methodology for testing the costs of new equity plans. ISS also indicated a desire to review its policy on a more fluid basis during the year, rather than in the last quarter only.
Coming down the pike from Glass Lewis:
- Not much new for now - the advisory firm says it doesn’t anticipate policy changes in 2014.
Common Comments from Institutional & Major Investors
- While they do rely on the advisory firms to analyze information, the investors said they don’t blindly follow their voting advice - and in some cases, don’t even look at the up-or-down recommendation. That makes it imperative that companies study investors’ specific guidelines to understand their priorities and concerns and take them into account.
- They applauded the move toward greater outreach to investors– but caution that it must be done at the right time of year (i.e., outside of the height of proxy season), contain a focused message, and be communicated by the right person (i.e., preferably Directors, rather than executives). Some investors indicated that they were fairly stretched and short-staffed to accommodate all attempts to do outreach.
- They consider supplemental filings unnecessary and, in some circumstances, plain annoying. Such filings, they added, should never be filed solely to criticize the advisory firms or their methodologies.
- The major investors are fine with the use of options and time-based restricted stock in pay programs – but only if the company clearly discloses how those grants fit into the overall comp program and fit into a balanced pay portfolio.
- Retention grants are a big pet peeve. The investors think they signal either that the company didn’t perform or the plan wasn’t designed properly. They also frown on awarding special sign-ons for contract renewal.
- Investors are generally fine with companies using discretion in their pay programs, so long as they explain their reasoning and the deviation from the plan fits into the PFP picture.
- They’re not focusing on proxy analyses of realizable pay, but say they do appreciate a “where are we now“ perspective, with information about grants in cycle, and how the cycles are panning out.
Check our website for our upcoming Client Alert, which will explain the details of, and offer more perspective on, the SEC’s proposed pay-ratio rules.
